El-Erian: Can European Hope be Turned Quickly into Reality?

Jim Cramer has brilliantly posed the most important question facing the markets today when thinking about the impact of Europe: "Is there too much hope here?"

The reason for renewed hope is three fold: Germany and France are now pushing simultaneously on two fronts to meaningfully strengthen the institutional underpinning of the Eurozone; there are signs that the IMF may get more involved, and possibly in a consequential manner; and we are likely to hear later today about the outcome of efforts to enhance the EFSF (both sources and uses).

But for the markets to sustain this week's rally, it is critical for hope to be translated into reality over the next ten days; and that this be done in a manner that induces the ECB to go "all in."

In this context, investors should monitor closely indications that, in the run up to the December 9th European Summit, at least nine Eurozone countries are readily buying into the Franco-German initiatives. They should also assess whether the EFSF is being realistically and consequentially strengthening.

Without quick progress on these two issues, the ECB's reluctance would persist, and understandably so. After all, it is a monetary institution that has already engaged its balance sheet in a meaningful (and previously unthinkable) manner, yet to no avail when it comes to decisively fixing Europe's crisis. So rather than continue just to contaminate its balance sheet, it is seeking assurances that it can be a bridge to somewhere.

In turn, this brings up other complicated issues. Can policymakers quickly reverse the damage donelast week to the functioning of key Eurozone markets? Can the growing fragility of the banking system be reversed? And, given that debt sustainability involves both a numerator and a denominator (namely, debt load and resources to make payments, respectively), can Europe combine debt containment with growth and employment promotion?

Your analysis of all this is what translates into an answer to Jim's key question.

Dr. Mohamed El-Erian is CEO and co-CIO of PIMCO, the bond investment house.